Senior Liens - Foreclosure

HOA boards are required to collect delinquent assessments to avoid breaching their fiduciary duty: Given that some owners are upside down in their mortgages (they owe more than the property is worth), some cease paying their mortgages and HOA assessments.

To protect the HOA and its members, boards should record a lien against delinquent owners. In addition, boards should record a blanket Request for Notice Under Civil Code Section 29246 so they can quickly learn of the new owner's Identity whenever a lender forecloses. To illustrate how the foreclosure process works, assume the following liens are on a unit/lot.

• First mortgage of $600,000 on property worth $500,000, and

• HOA's assessment lien for $10,000,

If the first mortgage holder (senior lien holder) forecloses ahead of the HOA, the HOA's lien will be extinguished and the $10,000 owed by the delinquent owner becomes unsecured. However, the HOA can still make a claim on any surplus funds resulting from the first mortgage holder's sale. In most cases there are none. Even though the HOA's secured position is extinguished, it can still sue the former owner for a money judgment.

If the mortgage holder begins foreclosure ahead of the HOA, the board should still proceed with its own collection action. Waiting for the lender is a bad idea since the bank's sale might be delayed for a long period of time, and would leave the HOA even further behind in its collection efforts. Lender foreclosures may be delayed because:

• The lender is slow to pursue the sale due to internal issues,

• The lender makes a conscious decision not to sell because it does not want the property in its portfolio,

• The owner works out a repayment plan with the lender,

• The owner stops the sale by curing the default, or

• The owner negotiates a short sale with the lender.

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